ORACLE CORP /DE/ - 10-K Annual Report

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Position and Results of Operations—Factors That May Affect Our Future Results or the Market Price of Our Stock.” When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Annual Report. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by us in fiscal year 2003, which runs from June 1, 2002 to May 31, 2003.

Oracle Corporation is the world’s largest enterprise software company. We develop, manufacture, market and distribute computer software that helps our customers manage and grow their businesses and manage their operations. Our software products can be categorized into two broad areas: database technology software and applications software. Our database technology software provides an internet platform for developing and deploying applications on the internet and on corporate intranets. Database technology software products include database management software, application server software and development tools that allow users to create, retrieve and modify the various types of data stored in a computer system. Our applications software can be accessed with standard web browsers and can be used to automate business processes and to provide business intelligence for marketing, sales, order management, procurement, supply chain, manufacturing, service, human resources and projects. We offer a fully integrated suite of applications built upon a unified information architecture. Our software runs on a broad range of computers, including mainframe computers, minicomputers, servers, workstations, personal computers, laptop computers and information appliances, such as hand-held devices and mobile phones. Our software is also supported on several different operating systems, including UNIX, Windows, WindowsNT, OS/390 and Linux. In addition to computer software products, we offer a range of consulting, education, support and other services. We also offer customers who choose not to install our applications on their own hardware outsourcing services that permit web browser access to our database technology and software applications hosted at sites that we operate or manage.

We were incorporated in 1986 as a Delaware corporation and are the successor to operations originally begun in June 1977. Our principal executive offices are located at 500 Oracle Parkway, Redwood City, California and our telephone number is 650-506-7000. Our web site is www.oracle.com. The information posted on our web site is not incorporated into this Annual Report.

Our product development platform is based on an internet architecture comprised of interconnected database servers, application servers and client computers or devices running web browsers. Internet computing allows business information and applications to be managed from centralized locations. End users can access business data and applications through standard web browsers. Database servers manage the underlying business information, while application servers run the business applications. These servers are typically managed by

professional information technology managers. In contrast, traditional client/server computing architectures require that each client computer run and manage its own applications and also be updated every time an application changes. We believe that the network-centric design of our software for internet computing improves network performance and data quality and helps our customers better control installation, maintenance and training costs associated with information technology infrastructure.

We believe that electronic commerce, broadly defined to include internal management of corporate data and functions through the application of internet services, as well as the exchange of goods and services over the internet, will play an increasingly important role in the future development of the world economy. This belief is a significant factor in our software development strategy. Electronic commerce can provide a relatively low-cost means to automate the supply chain, expand global markets, increase efficiency and improve customer service. We believe that as organizations transform the way their employees work, communicate, share knowledge and deliver value, they will need to develop and deploy internet-based business and commerce applications in order to remain competitive.

We enhance our existing products and develop new products to meet changing customer requirements. Research and development expenditures were 11%, 10% and 10% of total revenues in fiscal 2002, 2001 and 2000, respectively. As a percentage of license revenues, research and development expenditures were 31%, 25% and 23% in fiscal 2002, 2001 and 2000, respectively.

Our software products are categorized into two major product families: database technology and applications. Database technology revenues include revenue for database, internet application server and internet developer suite. License revenues from database technology products represented 28%, 32% and 33% of total revenues in fiscal 2002, 2001 and 2000, respectively. Application license revenues represented 7%, 9% and 9% of total revenues in fiscal 2002, 2001 and 2000, respectively.

In March 1999, we introduced Oracle8i, a database designed as the foundation for internet development and deployment. The Oracle8i database extended our technology in the areas of data management, transaction processing and data warehousing. Internet features, which are built directly inside the database, allow users to build internet applications that lower costs, enhance customer and supplier interaction and provide global information access over different computer architectures and across the enterprise.

In June 2001, we introduced Oracle9i, which is designed to run applications with a very high degree of scalability and reliability across multiple computers clustered together. The Oracle database with Real Application Clusters acts as a single database in a cluster of computers linked together, and does not require the data to be separated on multiple computers. Customers can simply add computers to the cluster, and the database software adapts to utilize the additional computing resources, thereby significantly improving application scalability and availability without requiring users to modify their applications. Customers can achieve significant cost savings by scaling up and eliminating fail-over servers, and by using lower cost hardware as the basis of the cluster, instead of large, more expensive computers.

In addition to Oracle9i Real Application Clusters, Oracle9i Database contains features that facilitate customers’ ability to build, deploy and manage internet applications at lower costs. The key features of Oracle9i include improved database availability, functionality, enhanced security capabilities and a more complete and integrated infrastructure for building business intelligence applications.

In June 2000, we introduced Oracle Application Server Version 8i, an open software platform for developing, deploying and managing distributed internet software application programs. Oracle Application Server 8i provided the infrastructure required to run internet computing applications and enabled customers to build and deploy portals, transactional applications and business intelligence facilities with a single product.

In October 2000, we introduced Oracle9i Application Server or Oracle9iAS, a consolidated software platform based on industry standards, which makes it easier for developers to build and deploy web services, web sites and portals and web-based applications. Oracle9iAS supports a range of development languages and tools, including the latest J2EE technologies, and complies with industry standards. In addition, Oracle9iAS includes clustering and caching technology, which significantly increases application reliability, performance and scalability. Oracle9iAS thereby enables customers to reduce the need for costly hardware or software infrastructure upgrades.

Oracle9iAS also includes Portal, which allows personalized portal sites to be rapidly developed and deployed, all with single sign on and security. Portal sites are assembled using ‘portlets’, which are reusable interface components that provide access to Web-based resources such as applications, business intelligence reports, syndicated content feeds and outsourced software services. With the Oracle9iAS Wireless Option, portal sites can be made available to any wireless device.

The Developer Suite includes Oracle JDeveloper, a Java development tool suite for modeling, building, debugging and testing enterprise-class applications. In addition, the suite contains Oracle Designer, a tool that allows developers to model business processes and automatically generates enterprise database applications, and Oracle Forms Developer, a development tool for building database applications that can be deployed unchanged in both internet and client/server based environments.

In July 2002, we introduced Oracle Collaboration Suite, a single, integrated suite that manages email and voicemail messages, facsimiles, calendaring, file sharing, search and workflow. The Oracle Collaboration Suite centralizes administration and lowers operating costs by consolidating email and file servers. The Oracle Collaboration Suite is built on the Oracle9i Database and Oracle9iAS, supports enterprise-scale implementations and offers high-availability features like rapid server failover, disaster recovery and automated backup.

The Oracle E-Business Suite, which is offered as an entire suite or on a component basis, provides integrated enterprise information that enables companies to manage their business cycles on a global basis and to solve end-to-end business problems. The Oracle E-Business Suite offers a family of applications that enable companies to automate discrete business flows such as procurement to payment or order to cash.

The Oracle E-Business Suite applications combine business functionality with innovative technologies, such as workflow and self-service applications, that enable users to lower the cost of their business operations by providing customers, suppliers and employees with self-service internet access to both transaction processing and critical business information. Self-service applications automate a variety of business functions such as customer service and support, procurement, expense reporting and reimbursement. The Oracle E-Business Suite can also help companies automate and improve business processes associated with marketing, sales, order management, procurement, supply chain, manufacturing, service, human resources and projects.

Available in approximately 30 languages, Oracle’s E-Business Suite applications also allow companies to operate in multiple currencies and to support both global and local business practices and legal requirements. We offer customers who choose not to install our applications on their own hardware, outsourcing services that permit web browser access to our applications hosted at sites that we operate or manage.

We classify our software activities into two categories: licenses and license updates. License revenues represent fees earned for licensing our database and applications software. License updates revenues represent fees earned for granting our customers the rights to software product upgrades, maintenance releases and patches during the support period, which is typically one year. We generally price license updates as a percentage of the net license fees and license updates can be purchased separately from product support.

The majority of our license customers purchase license updates upon the initial licensing of our software. In addition, the majority of these customers renew the updates rights annually. License updates revenues were 25%, 20% and 18% of total revenues in fiscal 2002, 2001 and 2000, respectively. License updates revenues grew 9% and 21% in fiscal 2002 and 2001, respectively. We believe that license updates represent a recurring source of revenues and will continue to grow if our installed base of licenses continues to expand. See “Results of Operations” in the Management’s Discussion and Analysis section of this Form 10-K for a more complete discussion of license and license updates.

We have trained personnel who offer consulting services in most of our sales offices around the world. Consultants supplement our product offerings by providing services to assist customers in the use of our technology and in the implementation of applications based on our products. Consulting revenues represented 20%, 21% and 23% of total revenues in fiscal 2002, 2001 and 2000, respectively.

A significant portion of support is comprised of customers’ license updates, which give customers rights to software product upgrades, maintenance releases and patches released during the term of the support period, which is typically one year. Revenues from license updates represented 25%, 20% and 18% of total revenues in fiscal 2002, 2001 and 2000, respectively.

The remainder of support revenues is comprised of product support services, which include internet access, telephone access and onsite access to technical support personnel. The support organization also offers advanced product support services including remote database administration and performance monitoring and tuning. Product support is provided by local offices, as well as by our four global support centers located around the world. Product support revenues represented 15%, 13% and 11% of total revenues in fiscal 2002, 2001 and 2000, respectively.

Our outsourcing services offer multi-featured software management and maintenance services. We provide outsourced services for products such as the E-Business Suite, Oracle9i Database, Oracle9iAS and Oracle Collaboration Suite. With Oracle E-Business Suite Outsourcing, customers gain access to their applications through a standard web browser and network connection. Oracle’s Technology Outsourcing administers, manages and maintains the Oracle9i Database and Oracle9iAS. Customers can choose to have their servers located at our own data centers, where we maintain both the software and hardware, or they can place and manage the servers they are using at their own locations or at qualified third party locations, and allow us to remotely manage the software. With either approach, we provide outsourced services that enable customers to lower information technology costs and improve their business efficiency. Outsourcing is a new service offering for us and revenues have not been material through May 31, 2002.

We sell our products in three key market segments: the enterprise business market, the government market and the general business market. We define the enterprise business market segment as those businesses with total annual revenues over specified amounts. These specified amounts vary by country, although we define the enterprise business in the United States as those businesses with total revenues of more than $1 billion. In the enterprise business market and government market segments, we believe that the most important considerations for our customers are performance, functionality, availability, product reliability, ease of use, quality of technical support and total cost of ownership, including the initial price and deployment costs, as well as ongoing maintenance costs. We define the general business market segment as those smaller than the enterprise businesses. In the general business market segment, we believe that the principal competitive factors are strength in distribution and marketing, brand name recognition, price/performance characteristics, ease of use, ability to link with enterprise systems and product integration. We believe that we compete effectively in each of these markets, although the competition is intense in each market.

Outside the United States, we market our products and services primarily through 65 subsidiary sales and service organizations. Our subsidiaries license and support our products in their local countries as well as within other foreign countries where we do not operate through a direct sales subsidiary. We also market our products through independent distributors in international territories not covered by our subsidiaries’ direct sales organizations.

We also market our products through indirect channels. The companies that comprise our indirect channel network are members of the Oracle Partner Program. Our partners resell our products or combine our database, application development tools and business applications with computer hardware, software application packages or services for subsequent redistribution and/or implementation.

The Oracle Partner Program allows us to pursue new business opportunities through partners as well as with direct customers. There are various types of partners participating in the Oracle Partner Program, including consultants, education providers, internet service providers, network integrators, resellers, independent software vendors and system integrators/implementers. Partners can also participate in the Oracle Technology Network and the Oracle Applications Network. These programs are specifically designed for the internet developer and business applications suite user communities, respectively. We provide applications, technology, education and technical support that enable our partners to effectively integrate our products into their businesses. The combination of the Oracle9i platform, the Oracle E-Business Suite and our partner’s expertise broadens our exposure in new markets.

The software industry is intensely competitive and rapidly evolving. We compete in various markets including the database, data warehouse, collaboration, application server, development tools, applications, consulting and outsourcing sectors. Our principal software competitors in the database management system and collaboration markets are International Business Machines Corporation and Microsoft Corporation. In the data warehousing market, our online analytical processing products compete primarily with those of Business Objects S.A., Cognos Incorporated and Hyperion Solutions Corporation. In the application server market, our competitors include International Business Machines Corporation, BEA Systems, Inc. and Microsoft Corporation. In the development tools market, we compete against International Business Machines Corporation, Borland Software Corporation and Microsoft Corporation. In the applications software market, our primary competitors include SAP Aktiengesellschaft, Siebel Systems, Inc. and PeopleSoft, Inc. In the consulting and outsourcing markets, we compete against International Business Machines Corporation Global Services, Electronic Data Systems and Accenture Ltd., as well as other service providers.

The standard end user license agreement for our products currently provides for an initial fee to use the product in perpetuity based on a maximum number of processors or a maximum number of named users. We also have other types of license agreements restricted by the number of employees or the license term. For software license arrangements that do not require significant modification or customization of the underlying software, we recognize revenue when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products or perform the services; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Substantially all of our license revenues are recognized in this manner. We generally recognize fees from licenses sold together with consulting services upon shipment, provided that the above criteria have been met, payment of the license

fees is not dependent upon the performance of the consulting services and the consulting services are not essential to the functionality of the licensed software. In instances where these criteria have not been met, both the license and consulting fees are recognized utilizing contract accounting. See “Critical Accounting Policies” in the Management’s Discussion and Analysis section of this Form 10-K for a more complete discussion of our license revenue recognition policies.

Support revenues consist of two components: license updates and product support services. License updates are generally priced as a percentage of the net license fees and can be purchased separately from product support. Product support is also generally priced as a percentage of the net license fees, however it is only offered to customers that have purchased license updates. Other support services include on-site support services, which vary depending on the level of support services purchased. Most customers purchase support initially and renew their support agreements annually. We generally bill support fees at the beginning of each support period. Support revenues are recognized ratably over the contract period, which is typically one year.

Name		Office(s)
Lawrence J. Ellison		Chief Executive Officer and Chairman of the Board of Directors
Jeffrey O. Henley		Executive Vice President, Chief Financial Officer and Director
Safra A. Catz		Executive Vice President and Director
George J. Roberts		Executive Vice President, North America Sales
Charles A. Rozwat		Executive Vice President, Database Server
Ronald A. Wohl		Executive Vice President, Applications Development
Sergio Giacoletto		Executive Vice President, Europe, Middle East and Africa
Derek H. Williams		Executive Vice President, Asia Pacific
Keith Block		Executive Vice President, North America Consulting
Daniel Cooperman		Senior Vice President, General Counsel and Secretary
Jennifer L. Minton		Senior Vice President, Finance and Operations

Mr. Henley, 57, has been Executive Vice President and Chief Financial Officer since March 1991 and has been a Director since June 1995. Prior to joining us, he served as Executive Vice President and Chief Financial Officer of Pacific Holding Company, a privately held company with diversified interests in manufacturing and real estate, from August 1986 to February 1991. Mr. Henley is a director of Computer Motion, Inc., a medical robotics company.

Ms. Catz, 40, has been Executive Vice President (currently responsible for Global Business Practices and Corporate Development) since November 1999 and has been a Director since October 2001. Ms. Catz served as Senior Vice President between April 1999 and October 1999. Prior to joining us, Ms. Catz was at Donaldson, Lufkin & Jenrette, a global investment bank that has since merged with Credit Suisse First Boston, where she was a Managing Director from February 1997 to March 1999, and a Senior Vice President from January 1994 until February 1997. Ms. Catz held various investment banking positions from 1986 until January 1994.

Mr. Roberts, 46, has been Executive Vice President, North America Sales since June 1999, and served as Senior Vice President North America Sales from July 1998 to May 1999. Mr. Roberts served as Senior Vice President, Business Online from April 1998 to June 1998. He took a leave of absence from July 1997 to April 1998. Mr. Roberts joined us in March 1990 and from June 1990 to June of 1997, served as Group Vice President, Central Commercial Sales.

Mr. Williams, 57, has been Executive Vice President, Asia Pacific Division since October 2000 and Senior Vice President, Asia Pacific from July 1993 to October 2000. Mr. Williams served as Vice President, Asia Pacific, from April 1991 to July 1993. Mr. Williams joined Oracle UK in October 1988 and served as Regional Director, Strategic Accounts from October 1988 to April 1991.

Mr. Block, 41, has been Executive Vice President, North America Consulting since February 2002 and served as Senior Vice President of North America Commercial Consulting and Global Service Lines from June 1999 until January 2002. He served as Senior Vice President of the Commercial Consulting Practice from April 1999 until May 1999. Mr. Block was Group Vice President, East Consulting from June 1997 until March 1999. Prior to joining us in 1986, Mr. Block was a Senior Consultant at Booz, Allen and Hamilton.

Mr. Cooperman, 51, has been Senior Vice President, General Counsel and Secretary since February 1997. Prior to joining us, Mr. Cooperman had been associated with the law firm of McCutchen, Doyle, Brown & Enersen since October 1977 and had served as a partner since June 1983. From September 1995 until February 1997, Mr. Cooperman was Chair of the law firm’s Business and Transactions Group and from April 1989 through September 1995, he served as the Managing Partner of the law firm’s San Jose Office.

Ms. Minton, 41, has been Senior Vice President, Finance and Operations since October 2001. She served as Senior Vice President and Corporate Controller from April 2000 to September 2001 and Vice President and Corporate Controller from November 1998 to March 2000. Ms. Minton joined us in May 1989 and held various positions in the finance organization including Assistant Corporate Controller and was a Vice President since August 1995.

Our properties consist of owned and leased office facilities for sales, research and development, consulting and administrative personnel. Our headquarters facility consists of approximately 2.5 million square feet in Redwood City, California. We also own or lease office facilities of approximately 7.9 million square feet in various locations in the United States and abroad.

Our common stock is traded on The Nasdaq National Market under the symbol “ORCL” and has been traded on Nasdaq since our initial public offering in 1986. According to the records of our transfer agent, we had 26,176 stockholders of record as of May 31, 2002. The majority of our shares are held in approximately two million customer accounts held by brokers and other institutions on behalf of stockholders, however we believe, that the number of total stockholders is less than two million due to stockholders with accounts at more than one brokerage. The following table sets forth the low and high sale price of our common stock, based on the last daily sale, in each of our last eight fiscal quarters.

The following table sets forth selected financial data for the last five years. In accordance with Financial Accounting Standards Board Emerging Issues Task Force (“EITF”) Issue No. 01-14, “Income Statement Characterization of Reimbursable Expenses,” which became effective in the fourth quarter of fiscal 2002, we reclassified reimbursable expenditures as revenue for all periods shown below. This selected financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K.

	Year Ended May 31,
(in millions, except per share data)		2002		2001		2000		1999		1998
Total revenues(1)	$	9,673	$	10,961	$	10,231	$	8,939	$	7,233
Operating income		3,571		3,777		3,080		1,873		1,244
Net income		2,224		2,561		6,297		1,290		814
Earnings per share—basic		0.40		0.46		1.11		0.22		0.14
Earnings per share—diluted		0.39		0.44		1.05		0.22		0.14
Working capital		4,768		5,046		5,021		2,401		1,839
Total assets		10,800		11,030		13,077		7,260		5,819
Long-term debt		298		301		301		304		304
Stockholders’ equity		6,117		6,277		6,461		3,695		2,958

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with our Finance and Audit Committee. See Notes to Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.

We derive revenues from two primary sources: (1) software license revenues and (2) services revenues, which include support, consulting, education and outsourcing revenues. While the basis for software license revenue recognition is substantially governed by the provisions of Statement of Position No. 97-2, “Software Revenue Recognition,” issued by the American Institute of Certified Public Accountants (“SOP 97-2”), we exercise judgment and use estimates in connection with the determination of the amount of software license and services revenues to be recognized in each accounting period.

For software license arrangements that do not require significant modification or customization of the underlying software, we recognize revenue when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products or perform the services; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Substantially all of our license revenues are recognized in this manner.

Many of our software arrangements include consulting implementation services sold separately under consulting engagement contracts. Revenues from these arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP 97-2. The more significant factors considered in determining whether the revenue should be accounted for separately include the nature of services (i.e., consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee.

the percentage-of-completion or completed-contract method as described below. Contract accounting is also applied to any arrangements: (1) that include milestones or customer specific acceptance criteria, which may affect collection of the license fees; (2) where services include significant modification or customization of the software; (3) where significant consulting services are provided for in the contract without additional charges; (4) where the license payment is tied to the performance of consulting services; or (5) where we have accepted responsibilities as a system integrator, delivering hardware or other third party products with our licenses and services.

For arrangements with multiple elements, we allocate revenue to each element of a transaction based upon its fair value as determined in reliance on “vendor specific objective evidence.” Vendor specific objective evidence of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices for those products and services when sold separately and, for support services, is additionally measured by the renewal rate. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered, services have been performed, or until fair value can objectively be determined. When the fair value of a license element has not been established, we use the residual method to record license revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

Our license arrangements generally do not include acceptance provisions. However, if acceptance provisions exist as part of public policy, for example in agreements with government entities when acceptance periods are required by law, or within previously executed terms and conditions that are referenced in the current agreement, we then apply judgment in assessing the significance of the provision. If we determine that the likelihood of non-acceptance in these arrangements is remote, we then recognize revenue once all of the criteria described above have been met. If such a determination cannot be made, revenue is recognized upon the earlier of receipt of written customer acceptance or expiration of the acceptance period.

We also evaluate arrangements with governmental entities containing “fiscal funding” provisions, where such provisions are required by law, to determine the probability of possible cancellation. We consider multiple factors, including the history with the customer in similar transactions, the “essential use” of the licenses and the planning, budgeting and approval processes undertaken by the governmental entity. If we determine that the likelihood of non-acceptance in these arrangements is remote, we then recognize revenue once all of the criteria described above have been met. If such a determination cannot be made, revenue is recognized upon the earlier of cash receipt or approval of the applicable funding provision by the governmental entity.

We assess whether fees are fixed or determinable at the time of sale and recognize revenue if all other revenue recognition requirements are met. Our standard payment terms are net 30; however, terms may vary based on the country in which the agreement is executed. Payments that extend beyond 30 days from the contract date but that are due within twelve months are generally deemed to be fixed or determinable based on our successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition.

While most of our arrangements include payment terms of less than one year, we have a standard practice of providing long-term financing outside of one year to credit worthy customers through our financing division. Since fiscal 1989, when our financing division was formed, we have established a history of collection, without concessions, on these receivables with payment terms that generally extend up to five years from the contract date. Provided all other revenue recognition criteria have been met, we recognize license revenue for these arrangements upon delivery, net of any payment discounts from financing transactions. In fiscal 2002, 2001 and 2000, approximately 13%, 16% and 17% of our license transactions were financed through our financing division. We have generally sold these receivables on a non-recourse basis to third party financing institutions. We account for the sale of these receivables as “true sales” as defined in Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

We estimate the percentage of completion on contracts with fixed or “not to exceed” fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. We recognize no more than 90% of the milestone or total contract amount until final acceptance is obtained. If we do not have a sufficient basis to measure progress towards completion, revenue is recognized when we receive final acceptance from the customer. When total cost estimates exceed revenues, we accrue for the estimated losses immediately based upon an average fully burdened daily rate applicable to the consulting organization delivering the services.

The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the percentage of completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.

We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.

We also record a provision for estimated sales returns and allowances on product and service related sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could be adversely affected.

We are currently involved in various claims and legal proceedings. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. In addition, see Note 15 of Notes to Consolidated Financial Statements for a description of our material legal proceedings.

Significant judgment is required in determining our worldwide income tax expense provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. Although we believe that our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and

We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance would not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made.

We provide for United States income taxes on the earnings of foreign subsidiaries unless they are considered permanently invested outside the United States. At May 31, 2002, the cumulative earnings upon which United States income taxes have not been provided are approximately $2.3 billion. If these earnings were repatriated to the United States, they would generate foreign tax credits that could reduce the Federal tax liability associated with the foreign dividend. Assuming a full utilization of the foreign tax credits, the potential deferred tax liability for these earnings is $522.7 million.

Delaware		94-2871189
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

		Page

PART I.
Item 1.	Business	1

Item 2.	Properties	9

Item 3.	Legal Proceedings	9

Item 4.	Submission of Matters to a Vote of Security Holders	9

PART II.
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	10

Item 6.	Selected Financial Data	10

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 7a.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 8.	Financial Statements and Supplementary Data	38

Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	38

PART III.
Item 10.	Directors and Executive Officers of the Registrant	39

Item 11.	Executive Compensation	39

Item 12.	Security Ownership of Certain Beneficial Owners and Management	39

Item 13.	Certain Relationships and Related Transactions	39

PART IV.
Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	40

	Signatures	74

	Low Sale Price		High Sale Price
Fiscal 2002:
Fourth Quarter	$	7.92	$	15.99
Third Quarter		13.70		17.26
Second Quarter		10.76		15.58
First Quarter		12.00		19.77
Fiscal 2001:
Fourth Quarter	$	13.25	$	21.38
Third Quarter		19.00		34.56
Second Quarter		22.31		46.32
First Quarter		36.16		45.47

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents